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When Enron Filed For Chapter 11 Bankruptcy On December 2, 2001 And Worldcom ...

When Enron filed for Chapter 11 bankruptcy on December 2, 2001 and WorldCom did the same later, investors blamed their business failures on accounting manipulations. This practice is not new. In fact according to Mishra and Drtina (2004) some 200 companies in the past five years have restated their earnings as a result of accounting manipulations. CFO Magazine survey indicates chief financial officers (CFOs) are forced to misrepresent earnings or are pressured to violate generally accepted accounting principles (GAAP) to satisfy shareholders and top executive management. Accounting manipulation not only offers the chance for companies like Enron and WorldCom to increase the asset valuation but also to understate liabilities that would appreciate stock prices, hide losses and increase company valuation. The practice is not limited to the US only.
In the UK accounting manipulation is also known as creative accounting. According to Amat, Blake and Dowds (1999) creative accounting refers to "a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business." Since the accounting process itself is flawed in the sense that it provides flexibility, and opportunities for manipulation and misstatement, financial professionals find it easy to engage in creative accounting. The practice helps in presenting increased profits, genuine economic growth and management efficiency whereas the opposite may also be true.
According to Kamal Nasser (1993 qt. Amat, Blake and Dowds 1999) "Creative accounting is the transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring some or all of them." The views of these authors indicate that accounting rules in Western countries are weak and offer plenty of room for manipulation. The damage resulting from accounting manipulation affects the accounting principles that the stakeholders, public and investors depend on and use to estimate, judge and predict corporate performance. The usefulness of accounting principles has regulated industries, balanced investment flow and capitalization in the past. However, Enron and the likes have proved that accounting principles (that the masses have depended on in the past) are unreliable. The scandals prove that accounting tools like financial ratio analysis or fundamental analysis for accounts estimation and prediction do not truly reflect the value of the investment. Artificial transactions can be used to manipulate balance sheet amount; profits can be moved from period to period; and assets can be re-arranged to depict a positive financial standing.


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